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Subsidized Versus Unsubsidized Student Loans -- Explained Simply!

By Todd Campbell - May 26, 2015 at 9:53AM

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A quick explanation of federal direct subsidized and direct unsubsidized student loans.

Source: Flickr user Roger Blackwell

Getting into college is hard, but navigating student loans can be an even bigger challenge. Don't worry, we're here to help. Read on to learn the differences between subsidized and unsubsidized student loans and what you need to know about applying for them, getting them, and paying them off.

A big problem
Students are increasingly exiting college with more and more in student loan debt. According to The College Board, the average price of attending a four-year private college has climbed by an inflation-adjusted 146% over the past 30 years, and the price to attend a four-year public college has soared by 225%.

The surging cost of a higher education is forcing students (and parents) to take on increasingly larger amounts of debt. According to the St. Louis Federal Reserve Bank, the amount owed on student loans has grown from $509 billion in 2006 to more than $1.3 trillion.

That's a lot of money and a good portion of it is in the form of either direct subsidized or unsubsidized loans made by the Department of Education.

Demystifying the differences
If you've already filled out your Free Application for Federal Student Aid, or FAFSA, and gotten a reply, you may have noticed that your aid package includes either direct subsidized or direct unsubsidized loans, or some combination of the two.

If you're offered a direct subsidized loan, it means that the Department of Education will pick up the tab for interest on your loan while you're in school at least half-time and, in many cases, for the six months after you leave school. It will also pay your interest if you enter into a deferment period in which you qualify to put off making your student loan payments.

Unsubsidized student loans; however, mean that you're on the hook for those interest payments from day one. That means that if you decide to put off paying interest on unsubsidized loans while you're in school, the interest will be added to your outstanding loan balance.

Who gets what? And why?
Whether or not you are offered a direct subsidized or direct unsubsidized loan depends on your financial situation. In filling out your FAFSA you are asked a series of questions about your family's financial situation, including questions about income and savings. You may also be required to submit financial documents, such as tax returns, that back up your answers.

Once the application has been submitted, a determination of financial need is made that considers your situation. If you're pursuing an undergraduate degree and your financial need merits it, then you could be offered a direct subsidized loan. If your financial situation results in you not qualifying, then an unsubsidized loan may be offered.

Regardless of where you attend and how much your tuition is, the amount of the subsidized loan that you may be offered is limited based on a slate of factors that are outlined in the following chart. Generally, if you're claimed as a dependent by someone else, you can receive up to $5,500 in subsidized loans during your first, third, and fourth year of undergraduate enrollment, and $4,500 during your second year of enrollment. Overall, you can receive up to $31,000 in total subsidized and unsubsidized loans, but only $23,000 of this amount can be in the form of subsidized loans.

Source: StudentAid.Ed.Gov

Oh, and one more thing ...
The average graduate is saddled with $29,000 in student loan debt and paying that debt can end up eating a big chunk of a person's income, so it's wise to only accept aid in the form of subsidized and unsubsidized loans if you really need it. If you do, then make sure that you stay on top of all the various loans and their payment due dates because falling behind on those payments can significantly impact your credit score. If times do get tough, don't ignore the situation. Reaching out to your lender quickly can often lead to changes to your payment plan that can protect your credit while you get back on your feet.

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